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Will India benefit from this WTI Crude oil crash?

On 20th April 2020 the week opened with the WTI Crude contract falling into negative territory, for the first time in history!

This sent shock waves across the world.

What happened there? And, more importantly, will India – a country which imports 82.8% of its crude oil requirements – be able to make the most of this situation?

Our commodity analysts created a detailed report explaining the factors behind the fall in WTI prices (do write into us at blogcontent@ventura1.com if you would like us to send you an e-copy of it).

They highlighted three factors that were mostly to blame for this anomaly. To put it very simplistically, they said…

Oil markets are oversupplied (Demand is lower than Supply)

The oil market is running out of storage space

There is a technical glitch which makes it difficult to stop crude oil production.

But that being that, let’s come back to the issue of whether India can benefit from the sheer drop in WTI prices…

Unfortunately, our analysts’ answer is No.

They say that at best, India may benefit from a reduction in our CAD.

And why is that?

1. India demands a different grade of crude

India imports proportionately very little WTI oil. The prices of crude in the country are more driven by another benchmark, the Brent, which is still trading at $20 to $23/barrel.

Why are we benchmarked to the Brent?

Brent is a low-density crude, with low sulphur content (sweet), and hence is ideal for refining. It is extracted from the North Sea. On the other hand, WTI is extracted from land-locked regions in the US and is light in nature.

Brent prices are dependent on OPEC and its decision to increase or decrease oil supply while WTI prices are dependent on production in the US.

Brent Crude is the benchmark for the rest of the world too. In fact, nearly two-thirds of the world’s oil demand is for Brent.

According to the Petroleum Planning and Analysis Cell (PPAC), the Indian basket of crude oil represents a derived basket comprising sour grade (Oman and Dubai average) and sweet grade (Brent) of crude oil processed in Indian refineries, in the ratio of 75.5 to 24.5. WTI prices may, however, have some impact on Brent prices, in the long run.

2. India’s demand has slumped 60-70% due to the ongoing Lockdown

The pandemic-driven shutdown of non-essential businesses in the country is catastrophic for fuel demand. Bloomberg reported that the three state refiners that account for more than 90% of the nation’s fuel sales are predicting a decline of about 60% in gasoline consumption in April compared with last year and a 40% slump in diesel use. The sale of automobile fuels itself has slumped by around 80% in the cities and 60% in rural areas since March 25.

3. India has very low SPRs compared to other countries

Despite being the third largest consumer in the world and importing over 80% of its crude oil requirements, India’s Strategic Petroleum Reserve (SPR) capacities as a whole is just 39 million barrels (MB). In layman terms, it means that if India were to buy and store crude, it could at best store 39 MB. This is very low compared to Strategic Petroleum Reserve (SPR) capacities of the US (730 MB), China (550 MB), Japan (528 MB) and South Korea (214 MB).

At the same time, our crude oil consumption averaged at around 4.5 MB per day in 2019. So, effectively, India’s SPR capacity is at best equivalent to 9 days of average usage or actual consumption and 14-16 days of usage at the current rate of consumption.

This means that India cannot benefit from crude oil price falls as it will not really be able to buy and store much.

4. India could benefit from a fall the Current Account deficit (CAD)

India is the second largest importer of crude oil in Asia, after China. Falling crude oil prices (specifically that of Oman and Dubai average and sweet grade Brent) will lower its import bill. That could, in turn, could help reduce India’s inflation and narrow the country’s trade and current account deficits. Every dollar per barrel drop in crude prices reduces India’s import bill by Rs 10,700 crore approximately, on an annualized basis. The significant drop in all varieties of crude oil prices coupled with the government’s recent hiked in excise duty on petrol by Rs 6/litre (from Rs 2 to Rs 8 ) and Diesel by Rs 3/litre may improve our CAD .

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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